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Rental properties
Tax considerations on a licence over rental property.
My client has over 40 residential rental properties which he licences to a company that he owns. The licence fee on each of these properties is £2,400.
The income from rents is mainly used to pay an outstanding mortgage against some of the properties. The company manages the properties, finds tenants, repairs them and bears all other costs and retains any profit minus the licence fee.
The fee of £2,400 per property does not appear to have changed for some time and I am not sure how this was calculated. This arrangement does not appear to be a commercial one, as the company ends up with a healthy profit each year which otherwise would have been taxed on the client at a higher rate.
What do readers think about the practical and tax implications of this arrangement?
Query 19,915 – Licence to kill.
Offshore company
Holding over a capital gain on a distribution to beneficiaries.
My client created an offshore trust back in 1999 when he was not UK domiciled, so that the trust assets are excluded property. As was standard planning at that time, the funds were used to create an overseas company, which then purchased a property in London. The property remains the company’s sole asset.
It has been suggested that the offshore company be distributed to UK resident beneficiaries. Given the change in the rules for overseas companies, there will be a capital gains tax charge in relation to the gain on the property in the period from 6 April 2019 to the date of transfer of the shares. I am unclear on how this gain which attracts tax in the UK interacts with the section 87 pool for attribution of gains to beneficiaries. I would presume that a gain that has suffered tax in the UK should not be added to the pool, but I cannot find any legislation or guidance to this effect.
I presume that the pre-2019 capital gain will be added to the pool and that will be attributed to the beneficiaries receiving a share of the property. If my assumption is correct, that is likely to make the distribution prohibitively costly as the property has appreciated by £2.5m. However, the trustee has asked whether it is possible to hold over the capital gain on distribution to the beneficiaries under TCGA 1992, s 260?
I would be grateful if readers could confirm my understanding that the hold over election will only apply to the post-2019 element that would be subject to UK tax and the earlier gain would still be added to the s 87 pool.
Query 19,916 – Adviser.
Gift
Tax treatment of payment to personal assistant/friend.
I was interested to read last week’s Readers’ forum question 19,900 and the responses. I have a situation which has some similarities but also a key difference.
My client is also selling his company for consideration of several million pounds. He also wants to make a gift out of the proceeds but only to one person, his PA, who has been with him for many years through a number of different business ventures. She has also helped out (unpaid) from time to time with various items of family admin. She has become a family friend – she went to my client’s daughter’s wedding and my client is godfather to one of her children.
In my view, any gift to her would genuinely be a personal thank you and should not be subject to income tax.
Do readers agree? Both my client and his PA have strong ethical values and if there were any doubt about the matter, particularly as the gift may be in the order of £50,000, they would want to ensure that full disclosure should be made to HMRC.
Query 19,917 – Thoughtful.
Irish VAT problem
Northern Irish business with a contract in Dublin.
I have a difficult VAT problem for a client who runs a medium sized window cleaning business based in Northern Ireland.
For the last five years, the business has had a lucrative contract with the managing company of a block of flats in Dublin. The managing company is not registered for Irish VAT because its service charges to leaseholders are exempt from VAT. My client has charged 20% UK VAT on these fees.
A competitor in Ireland has reported my client to the Irish tax authorities, on the basis that they should be registered for VAT in Ireland and charging Irish VAT. The tax authorities agree and have issued a backdated Irish VAT number to my client from July 2016 when this contract started.
How does my client sort out this problem? Can he reverse the UK VAT paid on returns for the last five years on the basis that Irish VAT is due instead? Are there any other issues that I need to consider for my client? Is Irish VAT actually payable?
Readers’ thoughts would be appreciated.
Query 19,918 – Shining Sam.
